Jump to content
House Price Crash Forum
gf3

Black Box Approach To House Prices

Recommended Posts

I been thinking of how you could work out if buying house was worth it over a very long term.

compared to the yield on risk free 30 year government bonds <_<

So a £200,000 house could be rented for £10,000 a year giving a yield of 5% I think it is reasonable to say that house prices could go up with inflation at 2% maintenance costs of 1% a year.

So in this example a 6% yield.

30 year bonds are at 3.38% but I think it is better looking at the 20 to 30 year rate because the 10 bond is low and dragging the figure down. I reckon a rate of 3.66%.

So again in this example buying is better than renting. I would think if London house prices and London rents were put in this may not be the case.

BTW I am not looking at this from a BTL perspective I am looking at this from a cash buyers point of view.

Share this post


Link to post
Share on other sites

So a £200,000 house could be rented for £10,000 a year giving a yield of 5%

I rented from 2005 to 2010. First I rented a £700k West London apartment for £22k a year. Then I rented a £1200k West London house for £24k a year. That's a yield of 2-3%.

I bought in a market town on the south coast a couple of years ago. I don't see much around here that yields a landlord more than 2 or 3%. And that's without voids, service fees, or maintenance.

Edited by silver surfer

Share this post


Link to post
Share on other sites

I been thinking of how you could work out if buying house was worth it over a very long term.

compared to the yield on risk free 30 year government bonds <_<

So a £200,000 house could be rented for £10,000 a year giving a yield of 5% I think it is reasonable to say that house prices could go up with inflation at 2% maintenance costs of 1% a year.

So in this example a 6% yield.

30 year bonds are at 3.38% but I think it is better looking at the 20 to 30 year rate because the 10 bond is low and dragging the figure down. I reckon a rate of 3.66%.

So again in this example buying is better than renting. I would think if London house prices and London rents were put in this may not be the case.

BTW I am not looking at this from a BTL perspective I am looking at this from a cash buyers point of view.

Depends when you buy. The numbers made sense in 1998, not so much in 2008.

Share this post


Link to post
Share on other sites

Got to get up got to get up got to get up

Got to get up got to get up got to get up

And time won't take my love away

You're such a you're such a you're such a you're such a

Hot temptation

You just walk right in

Walk walk walk right in

Got to get up got to get up got to get up

Got to get up got to get up got to get up

Got to get up got to get up got to get up

Got to get up got to get up got to get up

Walk right in

Cuz you're right on time

Cuz you're right on time, right on time

Cuz you're right on time

Cuz you're right on time, right on time

Let me tell you, let me tell you

What you do, what you do, what you do to me

You're such a

Hot temptation

You just walk right in

Walk walk walk right in

Got to get up got to get up got to get up

Got to get up got to get up got to get up

Got to get up got to get up got to get up

Got to get up got to get up got to get up

Walk right in (away)

Cuz you're right on time

Cuz you're right on time, right on time

Cuz you're right on time

Cuz you're right on time, right on time

Cuz you're right on time, right on time

Cuz you're right on time, right on time

Cuz you're right on time, right right right on time

Cuz cuz you're right on time, right right right on time

Away

And time won't take my love away

Share this post


Link to post
Share on other sites

From memory there are a number of yields though there are people on here who know this stuff. I think you are looking at is the yield to maturity?

One might look at using discounted cashflow for both the bond and the rental. Again, people on here prob know how coupon payments are structured. Also might need to forecast inflation rates. If is a US $ bond then have to start messing about forecasting exchange rates. Maybe even need to look at tax treatments aswell if BTL.

Good luck!

Edited by Ash4781

Share this post


Link to post
Share on other sites

Got to get up got to get up got to get up

Got to get up got to get up got to get up

And time won't take my love away

You're such a you're such a you're such a you're such a

Hot temptation

You just walk right in

Walk walk walk right in

Got to get up got to get up got to get up

Got to get up got to get up got to get up

Got to get up got to get up got to get up

Got to get up got to get up got to get up

Walk right in

Cuz you're right on time

Cuz you're right on time, right on time

Cuz you're right on time

Cuz you're right on time, right on time

Let me tell you, let me tell you

What you do, what you do, what you do to me

You're such a

Hot temptation

You just walk right in

Walk walk walk right in

Got to get up got to get up got to get up

Got to get up got to get up got to get up

Got to get up got to get up got to get up

Got to get up got to get up got to get up

Walk right in (away)

Cuz you're right on time

Cuz you're right on time, right on time

Cuz you're right on time

Cuz you're right on time, right on time

Cuz you're right on time, right on time

Cuz you're right on time, right on time

Cuz you're right on time, right right right on time

Cuz cuz you're right on time, right right right on time

Away

And time won't take my love away

Good one! Crikey, that song stands up - better than most stuff out there today. I sound like an old man... but 1989 - happy daze, first year at university, Berlin wall falling, cocktails and the City were cool and here we have Katrin Quinol lip syncing to Heather Small's incredible voice. Actually the song sounds better now than it did back then.

(Can someone tell me how to embed video, I know hardly anybody will click a link without some image of what it is.)

Oh yeah yields. You can probably figure out if property is "too expensive" using yields. But you will learn nothing about the direction of prices in the short term.

Share this post


Link to post
Share on other sites

Good one! Crikey, that song stands up - better than most stuff out there today. I sound like an old man... but 1989 - happy daze, first year at university, Berlin wall falling, cocktails and the City were cool and here we have

Katrin Quinol lip syncing to

Heather Small's incredible voice. Actually the song sounds better now than it did back then.

(Can someone tell me how to embed video, I know hardly anybody will click a link without some image of what it is.)

Oh yeah yields. You can probably figure out if property is "too expensive" using yields. But you will learn nothing about the direction of prices in the short term.

Be happy while you're living, for you're a long time debt.

(Don't ask me why the video has embedded, I did nothing)

Edited by 7 Year Itch

Share this post


Link to post
Share on other sites

I been thinking of how you could work out if buying house was worth it over a very long term.

compared to the yield on risk free 30 year government bonds <_<

So a £200,000 house could be rented for £10,000 a year giving a yield of 5% I think it is reasonable to say that house prices could go up with inflation at 2% maintenance costs of 1% a year.

So in this example a 6% yield.

30 year bonds are at 3.38% but I think it is better looking at the 20 to 30 year rate because the 10 bond is low and dragging the figure down. I reckon a rate of 3.66%.

So again in this example buying is better than renting. I would think if London house prices and London rents were put in this may not be the case.

BTW I am not looking at this from a BTL perspective I am looking at this from a cash buyers point of view.

Fortunately, you don't have to fit a new boiler to your bond every ten years ;-)

Share this post


Link to post
Share on other sites

Fortunately, you don't have to fit a new boiler to your bond every ten years ;-)

I did allow 1% or £2,000 a year for maintenance. Do you think this is enough?

Do you think the long term yield on money of 3.66% is reasonable. I based my figure on the 30 year bond. But personally I think this is low do you?

Share this post


Link to post
Share on other sites

Got to get up got to get up got to get up

Got to get up got to get up got to get up

And time won't take my love away

You're such a you're such a you're such a you're such a

Hot temptation

You just walk right in

Walk walk walk right in

Got to get up got to get up got to get up

Got to get up got to get up got to get up

Got to get up got to get up got to get up

Got to get up got to get up got to get up

Walk right in

Cuz you're right on time

Cuz you're right on time, right on time

Cuz you're right on time

Cuz you're right on time, right on time

Let me tell you, let me tell you

What you do, what you do, what you do to me

You're such a

Hot temptation

You just walk right in

Walk walk walk right in

Got to get up got to get up got to get up

Got to get up got to get up got to get up

Got to get up got to get up got to get up

Got to get up got to get up got to get up

Walk right in (away)

Cuz you're right on time

Cuz you're right on time, right on time

Cuz you're right on time

Cuz you're right on time, right on time

Cuz you're right on time, right on time

Cuz you're right on time, right on time

Cuz you're right on time, right right right on time

Cuz cuz you're right on time, right right right on time

Away

And time won't take my love away

https://www.youtube.com/watch?v=cP4PsscG7-I

Share this post


Link to post
Share on other sites

There is no comparrison historically.

If I put £200k in a 30 year bond in 1984 with a 3.6% yield, and then spent the money I got every year, the bond would have returned £216k in interest, and I'd still have the £200k principal back at maturity.

If I compounded the returns back into more 3.6% yielding investments, I would notionally have £558k.If I bought a house in London in 1984 for £200k it's value now would be around £1.12 million (based on 559% London HPI over the last 30 years) - It has doubled the overall growth of the bond described above, before even drawing a penny in rent. The rent you would be getting on a million pound house in London now would also be off the charts compared with the bond yield.

The question of future performance is rather trickier isn't it? We've had 30 years of steady inflation devaluing the bond, with HPI running well ahead of inflation figures to boot - likely for the next 30 years? If you want to make a long term comparrison, even ignoring the change in capital value and the cost of running the property as a rental, you need to predict what you think inflation will do to the value of your rental income VS your bond yield, and what other economic and social factors could impact the rent situation?

I did allow 1% or £2,000 a year for maintenance. Do you think this is enough?

Over a 30 year period I think you should probably budget for 2 boilers, at least one complete kitchen & bathroom refit, 3 sets of white goods & new flooring throughout three times. Then add your normal spruce up redecoration between occupants, plumbing repairs, roof repairs etc... on top of that, and insurance. If you want to compare with a bond, you should budget to pay somebody else to do all of that at all times, and a property management company to handle everything. A property management company I looked into recently report 96.5% occupancy on their property, so you should take £350 a year off the rental income too.

Share this post


Link to post
Share on other sites

So a £200,000 house could be rented for £10,000 a year giving a yield of 5% I think it is reasonable to say that house prices could go up with inflation at 2% maintenance costs of 1% a year.

So in this example a 6% yield.

Not seen any yields near that, best I've seen is 4% assuming no voids, maintenance or agent costs. Which means probably closer to 3%.

Capital appreciation is anyones guess, hard to imagine we're not at a top now though?

Share this post


Link to post
Share on other sites

There is no comparrison historically.

If I put £200k in a 30 year bond in 1984 with a 3.6% yield, and then spent the money I got every year, the bond would have returned £216k in interest, and I'd still have the £200k principal back at maturity.

If I compounded the returns back into more 3.6% yielding investments, I would notionally have £558k.If I bought a house in London in 1984 for £200k it's value now would be around £1.12 million (based on 559% London HPI over the last 30 years) - It has doubled the overall growth of the bond described above, before even drawing a penny in rent. The rent you would be getting on a million pound house in London now would also be off the charts compared with the bond yield.

The question of future performance is rather trickier isn't it? We've had 30 years of steady inflation devaluing the bond, with HPI running well ahead of inflation figures to boot - likely for the next 30 years? If you want to make a long term comparrison, even ignoring the change in capital value and the cost of running the property as a rental, you need to predict what you think inflation will do to the value of your rental income VS your bond yield, and what other economic and social factors could impact the rent situation?

Over a 30 year period I think you should probably budget for 2 boilers, at least one complete kitchen & bathroom refit, 3 sets of white goods & new flooring throughout three times. Then add your normal spruce up redecoration between occupants, plumbing repairs, roof repairs etc... on top of that, and insurance. If you want to compare with a bond, you should budget to pay somebody else to do all of that at all times, and a property management company to handle everything. A property management company I looked into recently report 96.5% occupancy on their property, so you should take £350 a year off the rental income too.

I was trying to do a comparison between investing your capital and renting over buying. If we could come to some agreement on what was a reasonable yield some one could expect from their capital. We could then look to see if buying a house stacks up.

If buying a house does stack up then house prices may rise if they don't they could fall.

Share this post


Link to post
Share on other sites

You mean renting using the income from investments VS buying a house and living in it yourself?

Why would you use a virtually zero risk bond as a comparator, rather than a balanced portfolio? Buying property isn't zero risk..?

Share this post


Link to post
Share on other sites

I was trying to do a comparison between investing your capital and renting over buying. If we could come to some agreement on what was a reasonable yield some one could expect from their capital. We could then look to see if buying a house stacks up.

If buying a house does stack up then house prices may rise if they don't they could fall.

<satire>

This is a totally reasonable thing to do.

By the way, I have some tulip bulbs. There have been some market dislocations and accordingly it has been tricky calculating their yield. What I really want is some nice tulips. However, it's tricky putting a price on how much I am willing to pay for a nice tulip.

My thinking has become further muddled because whilst I try to sort out my ideas about what I think the tulips are worth to me some speculators have noticed that tulip prices are rising and they are tipping into the tulip market.

Now, I love tulips.

Actually, I love them so much that it's almost a need, like the way one needs food or shelter.

Now I know that tulip prices are inflated by the speculation, but what if it gets worse?

I mean, shouldn't I overpay now, to protect myself from the possibility that tulip prices rise faster?

Obviously, in the long, long run nobody really needs so many tulips or can afford to pay so much to secure a portion of the available tulips, but I want some tulips now - so what should I do?

</satire>

Calculating yield on UK house prices today :lol:

It's speculation. It's a speculative bubble. People are continuing to pay more than they can afford because the fact that it is a speculative bubble escapes them.

When the interest-only, self-certified idiots who kicked off the 2003-2008 run are burned, you'll know that the speculative frenzy is at an end - and, by the way, in the less fashionable parts of Manchester and Newcastle, that ship sailed already.

There is nothing to see here. Nothing new, nothing interesting. Just tulips.

Calculate yields all you want. When you have that nailed down, the scholastics have an unsolved research problem regarding the number of angels that can dance on the head of a pin.

Tulips, all the way down.

Edited by ex nihilo de novo

Share this post


Link to post
Share on other sites

I rented from 2005 to 2010. First I rented a £700k West London apartment for £22k a year. Then I rented a £1200k West London house for £24k a year. That's a yield of 2-3%.

I bought in a market town on the south coast a couple of years ago. I don't see much around here that yields a landlord more than 2 or 3%. And that's without voids, service fees, or maintenance.

134k in rent in 6 years :rolleyes: , no offence but why did you not just buy something back in 2005 ?

Share this post


Link to post
Share on other sites

To attempt to give the OP a sensible answer, the forward expected yield on the S&P 500 is 6.1%; the actual dividend yield is 1.95%; the 30 year is at 3.3%.

http://online.wsj.com/mdc/public/page/2_3021-peyield.html

http://stockcharts.com/freecharts/yieldcurve.php

But VIX is at 11.4 while the S&P 500 is at record highs.

Markets are frozen at low yields, for the time being.

Interesting times; here's a fairly good article:

http://online.barrons.com/news/articles/SB50001424053111904125704579591700716708592?mod=BOL_GoogleNews

Share this post


Link to post
Share on other sites

Hi JustYield and others. I've joined this forum to ask you, how do you calculate that "the forward expected yield on the S&P 500 is 6.1^ please?

Thanks

Notsure

To attempt to give the OP a sensible answer, the forward expected yield on the S&P 500 is 6.1%; the actual dividend yield is 1.95%; the 30 year is at 3.3%.

http://online.wsj.com/mdc/public/page/2_3021-peyield.html

http://stockcharts.com/freecharts/yieldcurve.php

But VIX is at 11.4 while the S&P 500 is at record highs.

Markets are frozen at low yields, for the time being.

Interesting times; here's a fairly good article:

http://online.barrons.com/news/articles/SB50001424053111904125704579591700716708592?mod=BOL_GoogleNews

Share this post


Link to post
Share on other sites

After looking up the phrase on the internet, the implied forward rate is a lot simpler than I expected: it is just the current quarterly dividend multiplied by four and divided by the share price. I had thought that there was some arcane PhD-level way of estimating what the market implied about the future.

Share this post


Link to post
Share on other sites

Katrin Quinol lip syncing to Heather Small's incredible voice.

Now we've got Mark Carney lip syncing to whatever George Osbourne tells him.

Share this post


Link to post
Share on other sites

After looking up the phrase on the internet, the implied forward rate is a lot simpler than I expected: it is just the current quarterly dividend multiplied by four and divided by the share price. I had thought that there was some arcane PhD-level way of estimating what the market implied about the future.

No, the yield I quoted is the next 12 months expected earnings divided by the current price. I was just noting that 6% looks quite impressive given we are at all time highs - so either it's right (and then the S&P could be a reasonable place to put new money) or the analysts have collectively over-estimated next years earnings (quite possible).

Earnings are either paid out as dividends or kept in the company (retained) in which case book value increases (or decreases with a loss). Dividend yield is interesting because it is real cash being reliably paid out (the ultimate measure of whether a company is making money).

Share this post


Link to post
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now

  • Recently Browsing   0 members

    No registered users viewing this page.

  • The Prime Minister stated that there were three Brexit options available to the UK:   224 members have voted

    1. 1. Which of the Prime Minister's options would you choose?


      • Leave with the negotiated deal
      • Remain
      • Leave with no deal

    Please sign in or register to vote in this poll. View topic


×

Important Information

We have placed cookies on your device to help make this website better. You can adjust your cookie settings, otherwise we'll assume you're okay to continue.